Carney angered many eurosceptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU. On Tuesday he said a lack of a transition would deliver a "large negative shock" to the British economy (Photo: Phil Noble - WPA Pool/Getty Images).

Bank of England Governor Mark Carney gave his backing to a Brexit deal struck by British prime minister Theresa May, saying the alternative of leaving the European Union with no transition could be akin to the 1970s oil shock.

“We have emphasised from the start the importance of having some transition between the current arrangements and the ultimate arrangements,” Carney said, speaking to lawmakers on Tuesday (20). “So we welcome the transition arrangements in the withdrawal agreement … and take note of the possibility of extending that transition period.”

May agreed with Brussels last week on a deal for Britain’s withdrawal from the EU in little more than four months’ time. But the agreement faces stiff resistance in her Conservative Party, meaning it could fail in parliament.

The value of sterling fell sharply on concerns that Britain could leave the EU with no deal.

Carney angered many eurosceptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU. On Tuesday he said a lack of a transition would deliver a “large negative shock” to the British economy

“This would be a very unusual situation,” he said. “It is very rare to see a large negative supply shock in an advanced economy. You would have to stretch back at least in our analysis until the 1970s to find analogies.”

An oil embargo by OPEC exporters imposed over the 1973 Arab-Israeli war and a leap in crude prices plunged many western economies into deep recessions.

Carney also said there were limits to what the BoE could do in the event of a Brexit shock to the economy, both in terms of offsetting a fall in demand and ensuring the country’s banking industry was able to continue lending.

“I think we’ve put (the financial sector) in a position … where it would dampen it,” he said. “That is not the same thing as saying it will be alright.”

Carney and other BoE officials speaking alongside him on Tuesday repeated their warning to investors not to assume that the central bank would respond to a no-deal shock by cutting interest rates, as it did after the Brexit referendum in 2016.

“That depends on the balance of demand, supply and the exchange rate… We could see either scenario,” Carney said.

He also said a planned analysis by the central bank of the economic implications of Brexit would not include a scenario in which Britain stays in the bloc.

Some of the analysis is due to be published on November 28 alongside the latest bank stress tests and an assessment of Britain’s financial stability by the BoE.

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